Dow 20,000? Not Quite Yet!

At Index Funds Advisors, Inc., we have long counseled investors not to pay heed to market predictions from the talking heads of high finance.

At Index Funds Advisors, Inc., we have long counseled investors not to pay heed to market predictions from the talking heads of high finance. Our latest example of an unfulfilled prediction comes from James Altucher of Formula Capital who stated a year ago on Yahoo's Daily Ticker that the Dow would go to 20,000 within a year. While the Dow (and the rest of the equity markets) had a nice run in 2012 and the first two months of 2013, the Dow closed on March 6th, 2013 at 14,296, meaning that it would need to increase by an additional 40% to meet Altucher's 20,000 mark. While we certainly want Altucher to be right even if he is a year late, we note that the approximate probability of a 40% or higher increase in the next 12 months is about 7%, based on an assumed average return of 9.5% with a standard deviation of 20.2% (derived from 85 years of historical returns). Even if Dow 20,000 is a ways off, it might be helpful for investors to consider the possibility of stock prices surging to unexpected heights even as they worry about them plunging to unexpected lows.

Perhaps it is unfair of us to pick on Mr. Altucher because he certainly does not want for company. From our friends at Business Insider, here is a collection of 36 gurus that were "made to look like fools by this market." Interestingly, all of them made the opposite error of Altucher in that they were too pessimistic. Some of these pundits like John Mauldin and Nouriel Roubini made their bearish calls in March of 2009, at the very bottom of the market. John Mauldin is listed on CXO Advisory's Guru Grades Web page where he gets an accuracy rating of 39.9%, but he is also in good company, as 42 of the 68 gurus score below 50%. The lowest of them, Robert Prechter who comes in at 21.7%, bases his forecasts on the Elliott Wave Principle. While I can't argue with the estimable Charles Ellis who said, "Market timing is a wicked idea. Don't try it – ever," I can't help but be tempted to try out a market-timing strategy that simply does the opposite of whatever Mr. Prechter is predicting. So far, I would have done quite well for myself. 

The point of discussing all these failed predictions is not to disparage the intelligence or question the qualifications of the predictors. We know that many of them are highly talented and successful people. We simply want to remind investors that markets move in response to news which, by definition, is unpredictable. Investors who make decisions based on the prognostications of pundits are likely setting themselves up for failure, and investors who make predictions of their own should pause to consider the dismal record of predictions by the experts and then ask themselves why they should expect to do any better.

 

Follow-Up: In a recent episode of Yahoo’s Daily Ticker, James Altucher once again predicted that Dow 20,000 would be reached in 2014 or early 2015, about 2 years from now. Again, we hope he is right, but we won’t hold our breath.

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